QL Resources BUY Target Price RM4.00 by OSK

OSK Research has reduced its 2011/12 forecast earnings for QL Resources by one per cent to 5.3 per cent, saying that heavy rainfall in Indonesia and the stake dilution of 40.5 per cent to 35 per cent in Boilermech had delayed the company from achieving its target fresh fruit bunch production volume in Vietnam.

The research house however raised its Future Value (FV) from RM3.51 to RM4, pegging at a higher price earnings (PE) of 19 times earnings per share in 2012, taking into account the potential catalyst from its venture into renewable energy and higher share liquidity post share placement exercise.

QL Resources is a regional integrated livestock farming player

and has diversified into the fisheries sector through the development of a marine-based manufacturing chain.

QL’s expansion plan in Indonesia is on track for completion (500,000 eggs per day by 1QFY13 and one million day-old chicks (DOC) by 2QFY12). Cianjur, Indonesia, has low egg/broiler consumption per capita and is situated between Jakarta and Bandung, which have the highest consumption of poultry products.

The production volume of poultry products in Cianjur is also relatively low compared with other areas. Upon the completion of the farms, QL will become a significant poultry player in the industry. While the DOC market is dominated by other major players, QL will be the largest layer farmer in Indonesia after the farm is up and running given that Charoen Pokhpand and Japfa Comfeed (major Indonesian poultry players) are not involved in egg farming. QL estimates that its average cost of production could be 5% lower than the industry average.

Our checks with management reveal that its expansion in Tay Ninh, Vietnam, to achieve a production volume of 500,000 eggs per day by 1QFY13 initially, will be delayed to 3QFY13 due to some local issues. Nonetheless, we believe there is much more room to grow in the country given that the poultry industry in Vietnam is still dominated by traditional small players while egg consumption is still low.

We think that concerns over rising radiation at Japan’s nuclear plant would actually benefit QL’s marine products manufacturing segment, albeit minimally. Malaysian scientists have reaffirmed that the radiation will not reach Malaysia due to its distance from Japan and this means that QL’s fish, caught in Southeast Asian waters, is safe for consumption.